1. In an action at law tried without a jury, where both parties
move at the close for judgment on the evidence and judgment is
rendered for the plaintiff, the question whether the evidence was
sufficient to warrant the judgment is a reviewable question of law.
P.
293 U. S.
355.
2. Consolidated income tax returns of affiliated corporations
must truly reflect taxable income of the unitary business, and may
not
Page 293 U. S. 352
be employed to enable the taxpayer to use more than once the
same losses for reduction of income. P.
293 U. S.
355.
3. As ground for an action by a corporation to recover the
amount of an income tax assessed on a consolidated return and
voluntarily paid by the plaintiff, the plaintiff claimed that
losses that accrued to it during the tax year by reason of the
liquidation in that year of one of its subsidiaries,
viz.,
the loss of the plaintiff's investment in the subsidiary's stock
and of money advanced to it amounting, above all credits, to more
than the amount of the tax, should have been deducted in the tax
computation.
Held, that the burden was upon the plaintiff
to prove that the losses claimed were not the reflections of losses
suffered by the subsidiary and which had been allowed for in the
returns and tax assessments for that and prior years, and that,
upon the evidence, the burden was not sustained, and the
defendant's motion for judgment in his favor should have been
granted. P.
293 U.S.
356.
66 F.2d 895 reversed.
Certiorari to review a judgment affirming a judgment against the
Collector in an action to recover an alleged overpayment of income
tax.
MR. JUSTICE BUTLER delivered the opinion of the Court.
Respondent brought this action in the District Court for
Northern California to recover $143,122.23 it had paid as income
tax for 1923. The complaint alleges facts upon which respondent
claims to have been overassessed in that sum as a result of failure
to take into account deductible losses. One loss ($479,625)
resulted from the liquidation in 1923 of A. F. Thane & Co., a
wholly owned subsidiary. The other ($953,134.49) was the
indebtedness
Page 293 U. S. 353
of that company to respondent, ascertained to be worthless and
charged off by the latter in that year. Petitioner's answer put in
issue some and admitted other allegations of the complaint. The
parties stipulated for trial by the court without a jury. The
evidence consisted of an agreed statement of facts and the separate
and consolidated tax returns for 1920 to 1923, inclusive, of
respondent, Thane & Co., and Pacific Lumber Company of
Illinois. At the close of the evidence, each party moved for
judgment. The court denied petitioner's motion, granted that of
respondent, and gave it judgment in the amount sued for with
interest and costs. The Circuit Court of Appeals affirmed. 66 F.2d
895.
The allegations of the complaint admitted by the answer, the
agreed statement, and the tax returns show:
During 1918, A. F. Thane & Co. had outstanding 600 shares of
capital stock of the par value of $100 each; respondent owned 540
for which it had paid $31,500, and A. F. Thane owned 60. In 1920,
the company increased its capital to 5,000 shares, respondent
subscribed and paid to the company par value, $100 per share, for
3,960, and Thane took the remaining 440 shares. In 1921, respondent
bought these shares for $52,125, and so became the owner of all,
for which it had paid $479,625. At the close of 1923, Thane &
Co. was dissolved and its remaining assets were transferred to
respondent. Between March 17, 1921, and the end of 1923, respondent
had advanced to it and paid for its account large sums. After
deducting the amount repaid plus the value of the assets
transferred at liquidation, Thane & Co. was indebted to
respondent in the sum of $953,134.49. Before the end of 1923,
respondent charged this off as a debt ascertained to be worthless
in that year.
From 1920 to 1923, inclusive, respondent, Thane & Co., and
the Pacific Lumber Company of Illinois made separate income tax
returns and also consolidated
Page 293 U. S. 354
returns as affiliated corporations. Their income taxes were paid
on the latter basis. In each year, respondent had a large net
income and Thane & Co. lost heavily; the Pacific Lumber Company
of Illinois lost in the first and had relatively small net income
in each of the other years.
* Their separate
returns for 1923 respectively showed net income of $1,379,494.78,
net loss of $229,942.15, and net income of $8,809.83. The
consolidated return reported net income of $1,158,362.46 on which
respondent paid $144,795.31 as the total income tax. Upon
examination and audit in the Bureau, a greater deduction was made
for depreciation than was claimed in the return, overpayment was
found in the amount of $1,673.08, and that was refunded.
Insisting that the losses here in question were deductible,
respondent filed a claim for refund of the balance, $143,122.23.
The letter of the deputy commissioner notifying it that the claim
would be rejected stated that, since Thane & Co. was affiliated
with respondent and allowance was made, in computing consolidated
not income, for all deductible losses sustained by the subsidiary
during the several years, a further deduction reflecting
Page 293 U. S. 355
directly or indirectly the same losses was not allowable. And
the claim was disallowed.
Petitioner's motion at the close of the evidence for judgment in
his favor raised the question of law whether the evidence is
sufficient to warrant judgment for respondent, and the trial
court's decision of that question was reviewable in the Circuit
Court of Appeals, and is here for decision.
United States v.
Jefferson Electric Mfg. Co., 291 U. S. 386,
291 U. S.
407.
Section 240(a) of the Revenue Act of 1921 declares:
"That corporations which are affiliated within the meaning of
this section may . . . make separate returns or, under regulations
prescribed, . . . make a consolidated return of net income . . . ,
in which case, the taxes thereunder shall be computed and
determined upon the basis of such return."
42 Stat. 227, 260. Treasury Regulations 62 provide:
"Consolidated returns are based upon the principle of levying
the tax according to the true net income and invested capital of a
single enterprise . . . [Art. 631.] Subject . . . to the
elimination of inter-company transactions . . . , the consolidated
taxable net income shall be the combined net income of the several
corporations consolidated."
Art. 636.
If not inconsistent with its obligation under the statute
accurately to report taxable income for 1923, respondent may deduct
the losses it sustained in that year as the result of its
investment in the stock of Thane & Co. and its advances to or
for that company.
Burnet v. Aluminum Goods Mfg. Co.,
287 U. S. 544,
287 U. S. 550.
But a consolidated return must truly reflect taxable income of the
unitary business, and consequently it may not be employed to enable
the taxpayer to use more than once the same losses for reduction of
income. Losses of Thane & Co. that were subtracted from
respondent's income are not directly or indirectly again
deductible.
Handy &
Harman
Page 293 U. S. 356
v. Burnet, 284 U. S. 136,
284 U. S. 140;
United States v. Ludey, 274 U. S. 295,
274 U. S. 301;
Ilfeld Co. v. Hernandez, 292 U. S. 62,
292 U. S. 68.
Respondent voluntarily paid the tax. When disallowing the claim for
refund, the Bureau notified it that losses in 1923 reflecting other
deductions would not be allowed. Presumably respondent had within
its control the records showing facts that would fully disclose the
relations between such losses and those reported in the returns of
Thane & Co. The Circuit Court of Appeals states that there is
no evidence of double deduction or any specific instance of such
deduction. But that absence of proof does not support the judgment.
Respondent had the affirmative of the issue, and the burden was on
it to show that allowance of the deduction claimed would not amount
to twice subtracting the same loss. That is an essential fact which
cannot be assumed. Respondent may not rely on mere assertion or
speculation.
Cochran v. United States, 254 U.
S. 387,
254 U. S. 393;
Fidelity Title & Trust Co. v. United States,
259 U. S. 304,
259 U. S. 306;
United States v. Anderson, 269 U.
S. 422,
269 U. S. 443;
Compania General v. Collector, 279 U.
S. 306,
279 U. S. 310;
United States v. Jefferson Electric Mfg. Co., supra, p.
291 U. S.
400.
The evidence not only fails to establish that essential fact,
but is little, if any, less than enough to show that the allowance
of the deductions claimed would be a second use of the same losses.
The details, given in the tabular statement printed in the margin
of an earlier page of this opinion, show that the losses of Thane
& Co., which operated through consolidated returns to reduce
respondent's income taxed, amount in all to more than respondent's
asserted 1923 losses, and to more than its income taxed in that
year. Thane & Co.'s statements attached to its separate tax
returns show liabilities in excess of assets in each year of the
affiliated period increasing annually until, by the end of 1923,
the deficit had become $1,453,134.49. Prior to 1920, Thane
Page 293 U. S. 357
& Co. had outstanding only $60,000 of capital stock, 90
percent of which was acquired by respondent for less than par.
During the affiliated period, its deductible losses amounted to
more than three times its capital. While it is conceivable that, as
suggested by respondent, the losses do not necessarily indicate
that thereby Thane & Co. became unable to pay its debts, the
circumstances tend strongly to indicate that they did cause its
breakdown, resulting in respondent's 1923 losses here claimed. If
these losses did not cause, or are not reflected in, those
sustained by respondent in 1923 as the result of its investment in
and advances to that company, it reasonably may be presumed that
respondent would have shown that fact.
The trial court should have granted petitioner's motion for
judgment in his favor.
Reversed.
* The tabulation is:
bwm:
----------------------------------------------------------------------------------
1920 1921 1922 1923
---------------------------------------------------------------------------------=
Pacific Lumber Company
of Maine, Respondent $2,262,959.39 $379,624.88 $1,266,450.51
$1,379,494.78
A. F. Thane & Company *443,821.95 *548,166.82 *344,791.49
*229,942.15
Pacific Lumber Company
of Illinois *23,052.35 18,314.97 31,198.03 8,809.83
------------- ----------- ------------ ------------
Consolidated 1,796,085.09 *$150,226.97 $ 952,857.05
$1,158,362.46
----------------------------------------------------------------------------------
* Net loss.
ewm:
The consolidated net loss of $150,226.97 for 1921 was allowed as
a deduction from the consolidated net income for 1922, resulting in
a consolidated net income for the latter year of $802,630.08, upon
which the tax was paid.